CP 7 : Presentation and Disclosure, CP 8 : Concepts of Capital and Capital Maintenance

Question 1

Introduction 1

Financial statements are viewed in the Framework as a communication tool wherein an entity presents and discloses information about its assets, liabilities, equity, income and expenses.

Answer 1

Financial statements are viewed in the Framework as a communication tool wherein an entity presents and discloses information about its assets, liabilities, equity, income and expenses.

Question 2

Introduction 2

• recognised assets, liabilities and equity are depicted in an entity’s statement of financial position and
• income and expenses are depicted in an entity’s statement(s) of financial performance

These are structured summaries that are designed to make financial information comparable and understandable.

An important feature of the structures of those summaries is that the amounts recognised in a statement are included in the totals and, if applicable, subtotals that link the items recognised in the statement.

Answer 2

• recognised assets, liabilities and equity are depicted in an entity’s statement of financial position and
• income and expenses are depicted in an entity’s statement(s) of financial performance

These are structured summaries that are designed to make financial information comparable and understandable.

An important feature of the structures of those summaries is that the amounts recognised in a statement are included in the totals and, if applicable, subtotals that link the items recognised in the statement.

Question 3

Introduction 3

Effective communication of information in financial statements makes that information more relevant and contributes to a faithful representation of an entity’s assets, liabilities, equity, income and expenses.

It also enhances the understandability and comparability of information in financial statements.

Answer 3

Effective communication of information in financial statements makes that information more relevant and contributes to a faithful representation of an entity’s assets, liabilities, equity, income and expenses.

It also enhances the understandability and comparability of information in financial statements.

Question 4

Introduction 4

Effective communication of information in
financial statements requires:

• focusing on presentation and disclosure objectives and principles rather than focusing on rules
• classifying information in a manner that groups similar items and separates dissimilar items; and
• aggregating information in such a way that it is not obscured either by unnecessary detail or by excessive aggregation

Answer 4

Effective communication of information in
financial statements requires:

• focusing on presentation and disclosure objectives and principles rather than focusing on rules
• classifying information in a manner that groups similar items and separates dissimilar items; and
• aggregating information in such a way that it is not obscured either by unnecessary detail or by excessive aggregation

Question 5

Introduction 5

Just as cost constrains other financial reporting decisions, it also constrains decisions about presentation and disclosure. Hence, in making decisions about presentation and disclosure, it is important to consider whether the benefits provided to users of financial statements by presenting or disclosing particular information are likely to justify the
costs of providing and using that information.

Answer 5

Just as cost constrains other financial reporting decisions, it also constrains decisions about presentation and disclosure. Hence, in making decisions about presentation and disclosure, it is important to consider whether the benefits provided to users of financial statements by presenting or disclosing particular information are likely to justify the
costs of providing and using that information.

Question 6

Presentation and disclosure objectives and principles 1

To facilitate effective communication of information in financial statements, when developing presentation and disclosure requirements in standards, a balance is needed between:

• giving entities the flexibility to provide relevant information that faithfully represents the entity’s assets, liabilities, equity, income and expenses; and
• requiring information that is comparable, both from period to period for a reporting entity and in a single reporting period across entities.

Answer 6

To facilitate effective communication of information in financial statements, when developing presentation and disclosure requirements in standards, a balance is needed between:

• giving entities the flexibility to provide relevant information that faithfully represents the entity’s assets, liabilities, equity, income and expenses; and
• requiring information that is comparable, both from period to period for a reporting entity and in a single reporting period across entities.

Question 7

Presentation and disclosure objectives and principles 2

Including presentation and disclosure is objectives in standards that supports effective communication in financial statements because such objectives help entities to identify useful information and to decide how to communicate that information in the most effective manner.

Answer 7

Including presentation and disclosure is objectives in standards that supports effective communication in financial statements because such objectives help entities to identify useful information and to decide how to communicate that information in the most effective manner.

Question 8

Presentation and disclosure objectives and principles 3

Effective communication in financial statements is also supported by considering the following principles:

• entity-specific information is more useful than standardised descriptions, sometimes referred to as ‘boilerplate’; and
• duplication of information in different parts of the financial statements is usually unnecessary and can make financial statements less understandable.

Answer 8

Effective communication in financial statements is also supported by considering the following principles:

• entity-specific information is more useful than standardised descriptions, sometimes referred to as ‘boilerplate’; and
• duplication of information in different parts of the financial statements is usually unnecessary and can make financial statements less understandable.

Question 9

Classification 1

Classification is the sorting of assets, liabilities, equity, income or expenses on the basis of shared characteristics for presentation and disclosure purposes.

Such characteristics include, but are not limited to, the nature of the item, its role (or function) within the business activities conducted by the entity, and how it is measured.

Answer 9

Classification is the sorting of assets, liabilities, equity, income or expenses on the basis of shared characteristics for presentation and disclosure purposes.

Such characteristics include, but are not limited to, the nature of the item, its role (or function) within the business activities conducted by the entity, and how it is measured.

Question 10

Classification 2

Classifying dissimilar assets, liabilities, equity, income or expenses together can obscure (uncertain) relevant information, reduce understandability and comparability and may not provide a faithful representation of what it purports to represent.

Answer 10

Classifying dissimilar assets, liabilities, equity, income or expenses together can obscure (uncertain) relevant information, reduce understandability and comparability and may not provide a faithful representation of what it purports to represent.

Question 11

Classification - Classification of assets and liabilities

Classification is applied to the unit of account selected for an asset or liability. However, it may sometimes be appropriate to separate an asset or liability into
components that have different characteristics and to classify those components separately. That would be appropriate when classifying those components separately would enhance the usefulness of the resulting financial information.

For example, it could be appropriate to separate an asset or liability into current and non-current components and to classify those components separately.

Answer 11

Classification is applied to the unit of account selected for an asset or liability. However, it may sometimes be appropriate to separate an asset or liability into
components that have different characteristics and to classify those components separately. That would be appropriate when classifying those components separately would enhance the usefulness of the resulting financial information.

For example, it could be appropriate to separate an asset or liability into current and non-current components and to classify those components separately.

Question 12

Classification - Classification of assets and liabilities (Offsetting)

Offsetting occurs when an entity recognises and measures both an asset and liability as separate units of account, but groups them into a single net amount in the statement of financial position.

Offsetting classifies dissimilar items together and therefore is generally not appropriate. Offsetting assets and liabilities differs from treating a set of rights and obligations as a single unit of account

Answer 12

Offsetting occurs when an entity recognises and measures both an asset and liability as separate units of account, but groups them into a single net amount in the statement of financial position.

Offsetting classifies dissimilar items together and therefore is generally not appropriate. Offsetting assets and liabilities differs from treating a set of rights and obligations as a single unit of account

Question 13

Classification - Classification of equity 1

To provide useful information, it may be necessary to classify equity claims separately if those equity claims have different characteristics.

Answer 13

To provide useful information, it may be necessary to classify equity claims separately if those equity claims have different characteristics.

Question 14

Classification - Classification of equity 2

Similarly, to provide useful information, it may be necessary to classify components of equity separately if some of those components are subject to particular legal, regulatory or other requirements.

For example, in some jurisdictions, an entity is permitted to make distributions to holders of equity claims only if the entity has sufficient reserves
specified as distributable. Separate presentation or disclosure of those reserves may provide useful information.

Answer 14

Similarly, to provide useful information, it may be necessary to classify components of equity separately if some of those components are subject to particular legal, regulatory or other requirements.

For example, in some jurisdictions, an entity is permitted to make distributions to holders of equity claims only if the entity has sufficient reserves specified as distributable. Separate presentation or disclosure of those reserves may provide useful information.

Question 15

Classification - Classification of income and expenses 1

Classification is applied to:

• income and expenses resulting from the unit of account selected for an asset or liability; or

• components of such income and expenses if those components have different characteristics and are identified separately. For example, a change in the current value of an asset can include the effects of value changes and the accrual of interest. It would be appropriate to classify those components separately if
doing so would enhance the usefulness of the resulting financial information.

Answer 15

Classification is applied to:

• income and expenses resulting from the unit of account selected for an asset or liability; or

• components of such income and expenses if those components have different characteristics and are identified separately. For example, a change in the current value of an asset can include the effects of value changes and the accrual of interest. It would be appropriate to classify those components separately if
doing so would enhance the usefulness of the resulting financial information.

Question 16

Classification - Classification of income and expenses 2

Recognised changes in equity during the reporting period comprise:

• income minus expenses recognised in the statement(s) of financial performance; and
• contributions from, minus distributions to, holders of equity claims.

A particularly important facet of classification is determining whether items of financial performance should be considered part of profit and loss or as other comprehensive income.

Answer 16

Recognised changes in equity during the reporting period comprise:

• income minus expenses recognised in the statement(s) of financial performance; and
• contributions from, minus distributions to, holders of equity claims.

A particularly important facet of classification is determining whether items of financial performance should be considered part of profit and loss or as other comprehensive income.

Question 17

Classification - Classification of income and expenses (Profit or loss and other comprehensive income ) 1

Income and expenses are classified and included either:

• in the statement of profit or loss; or
• outside the statement of profit or loss, in other comprehensive income.

Answer 17

Income and expenses are classified and included either:

• in the statement of profit or loss; or
• outside the statement of profit or loss, in other comprehensive income.

Question 18

Classification - Classification of income and expenses (Profit or loss and other comprehensive income ) 2

The statement of profit or loss is the primary source of information about an entity’s financial performance for the reporting period. That statement contains a total for profit or loss that provides a highly summarised depiction of the entity’s financial performance
for the period. Many users of financial statements incorporate that total in their analysis either as a starting point for that analysis or as the main indicator of the entity’s financial performance for the period.

Nevertheless, understanding an entity’s financial
performance for the period requires an analysis of all recognised income and expenses, including income and expenses included in other comprehensive income, as well as an analysis of other information included in the financial statements.

Answer 18

The statement of profit or loss is the primary source of information about an entity’s financial performance for the reporting period. That statement contains a total for profit or loss that provides a highly summarised depiction of the entity’s financial performance
for the period. Many users of financial statements incorporate that total in their analysis either as a starting point for that analysis or as the main indicator of the entity’s financial performance for the period.

Nevertheless, understanding an entity’s financial
performance for the period requires an analysis of all recognised income and expenses, including income and expenses included in other comprehensive income, as well as an analysis of other information included in the financial statements.

Question 19

Classification - Classification of income and expenses (Profit or loss and other comprehensive income ) 3

Because the statement of profit or loss is the primary source of information about an entity’s financial performance for the period, all income and expenses are included in that statement.

Answer 19

Because the statement of profit or loss is the primary source of information about an entity’s financial performance for the period, all income and expenses are included in that statement.

Question 20

Classification - Classification of income and expenses (Profit or loss and other comprehensive income ) 6

In the view of the Board, if the statement of profit or loss is the primary source of information about financial performance for a period, the cumulative amounts included in that statement over time need to be as complete as possible. As a consequence, income and expenses can only be excluded permanently from the statement of profit or loss if there is a compelling reason in to do so in any particular case.

In principle, therefore, income and expenses included in other comprehensive income in one period are reclassified from other comprehensive income into the statement of profit or loss in a future period when doing so results in the statement of profit or loss providing more relevant information, or providing a more faithful representation of the entity’s financial performance for that future period.

Answer 20

n the view of the Board, if the statement of profit or loss is the primary source of information about financial performance for a period, the cumulative amounts included in that statement over time need to be as complete as possible. As a consequence, income and expenses can only be excluded permanently from the statement of profit or loss if there is a compelling reason in to do so in any particular case.

In principle, therefore, income and expenses included in other comprehensive income in one period are reclassified from other comprehensive income into the statement of profit or loss in a future period when doing so results in the statement of profit or loss providing more relevant information, or providing a more faithful representation of the entity’s financial performance for that future period.

Question 21

Classification - Classification of income and expenses (Profit or loss and other comprehensive income ) 7

However, if, for example, there is no clear basis for identifying the period in which reclassification would have that result, or the amount that should be reclassified, the Board may, in developing standards, decide that income and expenses included in other
comprehensive income are not to be subsequently reclassified.

Answer 21

However, if, for example, there is no clear basis for identifying the period in which reclassification would have that result, or the amount that should be reclassified, the Board may, in developing standards, decide that income and expenses included in other
comprehensive income are not to be subsequently reclassified.

Question 22

Aggregation 1

Aggregation is the adding together of assets, liabilities, equity, income or expenses that have shared characteristics and are included in the same classification.

Answer 22

Aggregation is the adding together of assets, liabilities, equity, income or expenses that have shared characteristics and are included in the same classification.

Question 23

Aggregation 2

Aggregation makes information more useful by summarising a large volume of detail. However, aggregation conceals (hide) some of that detail.

Hence, a balance needs to be found so that relevant information is not obscured either by a large amount of insignificant detail or by excessive aggregation

Answer 23

Aggregation makes information more useful by summarising a large volume of detail. However, aggregation conceals (hide) some of that detail.

Hence, a balance needs to be found so that relevant information is not obscured either by a large amount of insignificant detail or by excessive aggregation

Question 24

Aggregation 2

Aggregation makes information more useful by summarising a large volume of detail. However, aggregation conceals (hide) some of that detail.

Hence, a balance needs to be found so that relevant information is not conceals either by a large amount of insignificant detail or by excessive aggregation

Answer 24

Aggregation makes information more useful by summarising a large volume of detail. However, aggregation conceals (hide) some of that detail.

Hence, a balance needs to be found so that relevant information is not conceals either by a large amount of insignificant detail or by excessive aggregation

Question 25

Aggregation 3

Different levels of aggregation may be needed in different parts of the financial statements.

For example, typically, the statement of financial position and the statement(s) of financial performance provide summarised information and more detailed information is provided in the notes.

Answer 25

Different levels of aggregation may be needed in different parts of the financial statements.

For example, typically, the statement of financial position and the statement(s) of financial performance provide summarised information and more detailed information is provided in the notes.

Question 26

Concepts of Capital and Capital Maintenance - Intro 1

The concept of capital maintenance is concerned with how an entity defines the capital that it seeks to maintain. It is a prerequisite for distinguishing between an entity’s return on capital (that is, profit) and its return of capital.

In general terms, an entity has maintained its capital if it has as much capital at the end of the period as it had at the beginning of the period. Any amount over and above that required to maintain the capital at the beginning of the period is profit.

Opening capital + profit = Closing capital
Express profit onto financial and physical capital maintenance

Answer 26

The concept of capital maintenance is concerned with how an entity defines the capital that it seeks to maintain. It is a prerequisite for distinguishing between an entity’s return on capital (that is, profit) and its return of capital.

In general terms, an entity has maintained its capital if it has as much capital at the end of the period as it had at the beginning of the period. Any amount over and above that required to maintain the capital at the beginning of the period is profit.

Opening capital + profit = Closing capital
Express profit onto financial and physical capital maintenance

Question 27

Concepts of Capital and Capital Maintenance - Intro 2

The Framework identifies two broad concepts of capital maintenance:

• financial capital maintenance
• physical capital maintenance

Answer 27

The Framework identifies two broad concepts of capital maintenance:

• financial capital maintenance
• physical capital maintenance

Question 28

Concepts of Capital and Capital Maintenance - Intro 3

The principal difference between the two concepts of capital maintenance is the treatment of the effects of changes in the prices of assets and liabilities of the entity. The selection of the appropriate concept of capital by an entity should be based on the needs of the users of its financial statements.

Answer 28

The principal difference between the two concepts of capital maintenance is the treatment of the effects of changes in the prices of assets and liabilities of the entity. The selection of the appropriate concept of capital by an entity should be based on the needs of the users of its financial statements.

Question 29

Concepts of Capital and Capital Maintenance - Intro 4

The concept of capital maintenance chosen by an entity will determine the accounting model used in the preparation of its financial statements. Most entities adopt a financial concept of capital. It is explained that different accounting models exhibit (publish) different degrees of relevance and reliability, and it is for management to seek a balance between relevance and reliability.

Answer 29

The concept of capital maintenance chosen by an entity will determine the accounting model used in the preparation of its financial statements. Most entities adopt a financial concept of capital. It is explained that different accounting models exhibit (publish) different degrees of relevance and reliability, and it is for management to seek a balance between relevance and reliability.

Question 30

Concepts of Capital and Capital Maintenance - Intro 5

The Framework notes that the revaluation or restatement of assets and liabilities gives rise to increases or decreases in equity that meet the definition of income and expenses, but – under certain concepts of capital maintenance – are included in equity as capital maintenance adjustments or revaluation reserves.

Answer 30

The Framework notes that the revaluation or restatement of assets and liabilities gives rise to increases or decreases in equity that meet the definition of income and expenses, but – under certain concepts of capital maintenance – are included in equity as capital maintenance adjustments or revaluation reserves.

Question 31

Financial capital maintenance 1

Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity.

Under this concept a profit is earned only if the financial (or money) amount of the net assets at the
end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.

Answer 31

Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity.

Under this concept a profit is earned only if the financial (or money) amount of the net assets at the
end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.

Question 32

Financial capital maintenance 2

Financial capital maintenance can be measured in either nominal monetary units or units of current purchasing power. The financial capital maintenance concept does not require a particular measurement basis to be used. Rather, the basis selected depends
upon the type of financial capital that the entity is seeking to maintain.

Answer 32

Financial capital maintenance can be measured in either nominal monetary units or units of current purchasing power. The financial capital maintenance concept does not require a particular measurement basis to be used. Rather, the basis selected depends
upon the type of financial capital that the entity is seeking to maintain.

Question 33

Financial capital maintenance 3

Where capital is defined in terms of nominal monetary units, profit represents the increase in nominal money capital over the period.

This has the implication that
increases in the prices of assets held over the period, conventionally referred to as holding gains, are conceptually profits. They may not be recognised as such, however, until the assets are disposed of in an exchange transaction.

Answer 33

Where capital is defined in terms of nominal monetary units, profit represents the increase in nominal money capital over the period.

This has the implication that increases in the prices of assets held over the period, conventionally referred to as holding gains, are conceptually profits. They may not be recognised as such, however, until the assets are disposed of in an exchange transaction.

Question 34

Financial capital maintenance 4

When the concept of financial capital maintenance is defined in terms of current purchasing power units, profit represents the increase in invested purchasing power over the period.

Thus, only that part of the increase in the prices of assets that exceeds the increase in the general level of prices is regarded as profit. The rest of the increase is treated as a capital maintenance adjustment and, hence, as part of equity.

Answer 34

When the concept of financial capital maintenance is defined in terms of current purchasing power units, profit represents the increase in invested purchasing power over the period.

Thus, only that part of the increase in the prices of assets that exceeds the increase in the general level of prices is regarded as profit. The rest of the increase is treated as a capital maintenance adjustment and, hence, as part of equity.

Question 35

Physical capital maintenance 1

Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.

The physical capital maintenance concept requires the current cost basis of measurement to be adopted.

Answer 35

Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.

The physical capital maintenance concept requires the current cost basis of measurement to be adopted.

Question 36

Physical capital maintenance 2

Because capital is defined in terms of the physical productive capacity, profit represents the increase in that capital over the period. Price changes affecting the assets and liabilities of the entity are changes in the physical productive capacity of the entity, which are therefore treated as capital maintenance adjustments within equity and not as profit.

Answer 36

Because capital is defined in terms of the physical productive capacity, profit represents the increase in that capital over the period. Price changes affecting the assets and liabilities of the entity are changes in the physical productive capacity of the entity, which are therefore treated as capital maintenance adjustments within equity and not as profit.